Model ETF Portfolios



by Dr Invest



One of the most difficult challenges for the amateur investor is where do I put my money? Let me warn you, this is the same challenge for professional investors.

I had an investment advisor who was exceptionally confident and I was certain he would make me alot of money. I was wrong. He put me into an actively managed fund, and when the fund was loosing hundreds of dollars over a period of a year, I questioned the wisdom of staying with the manager. My investment advisor reassured me... that I didn't know what I was talking about, and that the fund manager did! So the fund manager remained invested in INVERSE ETFs, thinking the market was going to plunge at any moment. After six more months losses, my investment advisor, being careful not to admit he ever made a mistake, simply said that he was moving out of the MANAGED FUND because it hadn't performed.

More confident than ever, he explained, "I hope you will stay with my company. I believe you will see dramatic increases after we shake this Managed Fund. Six months later, he had lost another $10,000 of my portfolio. I swore from that day on-ward, that if I remained just partially sane, I would be responsible for loosing my own money. And if it is within my ability, I am planning to loose nothing.

Now I am telling you this story, because I now know that my Financial Advisor was merely parroting the direcition he was getting from someone in New York. My Financial Advisor was managing NOTHING! He was simply putting me in the hands of institutional brokers who manage funds for Financial Advisors all over the U.S. My Financial Advisor wasn't thinking, he was just following the advice of someone else.

So here is a list of ETFs (Exchange Traded Funds) you can use to build your own portfolio. The ETF versions simply allow you to implement the portfolios at your brokerage firm of choice. ETFs can be traded just like stocks and you can use a stop-sell as an escape if the market sours. I suggest that you go to Yahoo.com to get a STOCK CHART / ETF CHART. Find out how the ETF has been performing. Is the  50 day moving average of the ETF above its 200 day moving average. If not, don't buy the ETF. Remember, treat the ETFs just like stocks. There needs to be a historical track record of the EFT in an UPWARD TREND. At the end, you will see my portfolio. I only buy if the ETF is in an uptrend. The price of the ETF must be higher than its 10 month SMA. (simple moving average)

1. Allan Roth’s Second Grader Portfolio

  • 60% Vanguard Total Stock Market ETF (VTI)
  • 30% Vanguard Total International Stock ETF (VXUS)
  • 10% Vanguard Total Bond Market ETF (BND)
The asset allocation between the funds is clearly intended for a younger, more aggressive investor. But Roth’s idea of keeping it simple applies to everyone. Even for investors close to (or in) retirement, these three ETFs should get the job done.

2. David Swenson’s Ivy League Portfolio

  • 30% Vanguard Total Stock Market ETF (VTI)
  • 5% Vanguard Emerging Mkts ETF (VWO)
  • 15% Vanguard Europe Pacific ETF (VEA)
  • 20% Vanguard REIT ETF (VNQ)
  • 15% Vanguard Intermediate-Term Government Bond ETF (VGIT)
  • 15% (TIP)
David Swenson, the Chief Investment Officer at Yale University, recommends the above portfolio (a 70/30 stock/bond allocation) in his Unconventional Success. He is a big proponent of equity-oriented allocations for investors with long time horizons.

3. Rick Ferri’s Core Four Portfolio

  • 36% Vanguard Total Stock Market ETF (VTI)
  • 18% Vanguard Total International Stock ETF (VXUS)
  • 6% Vanguard REIT ETF (VNQ)
  • 40% Vanguard Total Bond Market ETF (BND)
“You only need a few asset classes in your portfolio, and after that there are diminishing returns. The mutual funds you choose to represent those asset classes should be the lowest cost funds you can buy.” –Rick Ferri, CFA on the Bogleheads Forum

4. Bill Schultheis’ Coffeehouse Portfolio

  • 10% Vanguard S&P 500 Index ETF (VOO)
  • 10% Vanguard Value ETF (VTV)
  • 10% Vanguard Small-Cap ETF (VB)
  • 10% Vanguard Small-Cap Value ETF (VBR)
  • 10% Vanguard Total International Stock ETF (VXUS)
  • 10% Vanguard REIT ETF (VNQ)
  • 40% Vanguard Total Bond Market ETF (BND)
The title of Bill’s book, “The New Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get on with Your Life” is spot on. The above portfolio is intended to be rebalanced once per year and otherwise left alone. Sounds good to me.

5. Larry Swedroe’s Big Rocks Portfolio

  • 9% Vanguard S&P 500 Index ETF (VOO)
  • 9% Vanguard Value ETF (VTV)
  • 9% Vanguard Small-Cap ETF (VB)
  • 9% Vanguard Small-Cap Value ETF (VBR)
  • 6% Vanguard REIT ETF (VNQ)
  • 3% Vanguard Total International Stock ETF (VXUS)
  • 6% SPDR S&P International Dividend (DWX)
  • 3% Vanguard FTSE AW ex-US Sm-Cap ETF (VSS)
  • 3% WisdomTree International SmallCap Div (DLS)
  • 3% Vanguard Emerging Mkts ETF (VWO)
  • 40% Vanguard Short-Term Bond ETF (BSV)
You’ll note that Swedroe’s portfolio is significantly tilted toward small-cap and value equities (with the reasoning that their higher risk levels should bring higher expected returns). It’s more funds than I’d personally like, but Swedroe makes a valid point that if you’re only rebalancing annually, the additional effort required by having a few more funds in your portfolio is pretty minor.

6. Harry Browne’s Permanent Portfolio

  • 25% Vanguard S&P 500 Index ETF (VOO)
  • 25% Vanguard Long-Term Government Bond ETF (VGLT)
  • 25% Cash (i.e., money market funds)
  • 25% SPDR Gold Trust ETF (GLD)
The idea behind Browne’s Permanent Portfolio is that the four asset classes have sufficiently low correlation that the portfolio should be able to put up modest gains each year under just about any circumstance imaginable.

7. William Bernstein’s No Brainer Portfolio

  • 25% Vanguard S&P 500 Index ETF (VOO)
  • 25% Vanguard Small-Cap ETF (VB)
  • 25% Vanguard Total International Stock ETF (VXUS)
  • 25% Vanguard Total Bond Market ETF (BND)
Bernstein, author of The Four Pillars of Investing, suggests the above portfolio for investors with a long time horizon. Note that it’s very similar to the first portfolio mentioned above (Roth’s Second Grader Portfolio), but with a much heavier allocation toward small-cap domestic stocks.

8. Harry Markowitz’s “Father of Modern Portfolio Theory” Portfolio

  • 50% Vanguard Total World Stock ETF (VT)
  • 50% Vanguard Total Bond Market ETF (BND)
Harry Markowitz–Nobel Prize winner and originator of Modern Portfolio Theory–when asked about his personal portfolio once replied, “I should have computed the historical co-variances of the asset classes and drawn an efficient frontier…Instead, I split my contributions 50/50 between bonds and equities.” The above portfolio is a somewhat tongue-in-cheek implementation of Markowitz’s approach.

9. Dr Invest’s “Commission Free” Portfolio

  • DJP               iPath DJ-UBS Commodity Index
  • DBC             PowerShares DB Commodity Index
  • RWX            SPDR DJ International Real Estate
  • VNQ            Vanguard REIT Index
  • TIP              iShares Barclays TIPS Bond
  • BND           Vanguard Total Bond Market
  • VWO          Vanguard Emerging Markets Stock
  • VEU           Vanguard FTSE All-World ex-US
  • VB              Vanguard Small Cap
  • VTI             Vanguard Total Stock Market
Dr Invest –Use at your own risk, portfolio may lose money. The inspiration for the portfolios is Mebane Faber's The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets.  The rules for this portfolio are simple: Buy each ETF at the beginning of the month if it closed the previous month above its 10 month simple moving average. Check each month at the beginning of the month and only sell the ETF if it closed the month below its 10 month simple moving average. Keep any proceeds in cash (in other words, do not use the proceeds to purchase one of the other ETFs).

Ignore any activity that occurs within the month. For example, if the ETF closes the month above its 10 month SMA and falls below its 10 month SMA on the 8th, ignore this "noise". The positions should only be bought or sold at the beginning of the month.

Because of the overall volatility in the market as of November 2011, I am only in two of the ETFs. TIP and BND have never fallen below their 10 month SMA. DO NOT BUY THESE ETFs if they are below the 10 month SMA. I have made money off of all of these ETFs, but don't just stock up on the ETFs because I have mentioned them. Use a STOP-SELL and protect your investment.

Charts for FABER MODEL: http://dark-liquidity.com/MebaneFaber.php

Research on the FABER MODEL: http://www.cxoadvisory.com/6009/technical-trading/10-month-versus-200-day-sma/

The Ivy Portfolio Rules: http://www.advisorperspectives.com/dshort/updates/Monthly-Moving-Averages.php

Instructions for something called, PRO-FOLIO, which is copyright infringement on the FABER MODEL: I haven't read this carefully, but looks like the 10 month SMA, so make sure it follows the rules above: http://blog.pro-folio.net/files/8/9/6/7/6/276554-267698/Pro_Folio_Original.pdf



(Note: The above article is for entertainment only and should never be used for any kind of investment advice.)

 

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